Forex trading or making money off foreign exchange differences can be one of the most rewarding but risky ventures, especially for beginner traders. To start with, there are several things that you may not be familiar with that could fundamentally impact the outcome of your trades.
Whether it’s risk management, choosing brokers and platforms, or most importantly knowing which Forex Pairs to trade, you need to master all these moving pieces. Remember the forex market is a 24-hour market where you can trade literally every minute, but also where decisions change by the minute as well.
What is Forex Trading?
Forex trading refers to the exercise or business of trading one currency for another. The currencies are normally bundled in pairs such as AUD/USD, GBP/USD, and USD/CAD. Trading currencies requires you to be strategic in how you enter and exit trades.
It is possible for you to make money in both long and short positions. For instance, if you trade AUD/USD and you go long on the Australian Dollar, it means you anticipate the AUD to increase in value over the USD. This means you buy the AUD low and sell it when it has gained. This will make you profit from the difference. On the other hand, you can short the USD and make money as its price falls-selling high and buying low.
Over short durations, currencies can fluctuate in value relative to one another. These fluctuations or movements are called percentage-in-points or PIPs. It is from these movements that you profit.
While there are limitless opportunities to profit from forex trading, it is also possible for you to lose even your capital depending on how adverse your trades are. To help you get your grounding right, here are a few pointers to bolster your trading approach.
First and foremost, forex traders must understand the different currency pairs available and their nuances. If you want to trade the USD/CHF pair, you must understand the dynamics of the US and Swiss economies and their interaction.
Even so, caution is very important when analyzing such currency pairs. Being overly aggressive can make you take huge positions that may expose you to losses. On the other being overly conservative can make you lose opportunities to profit.
Forex trading much like any other form of trade requires that you invest money to get a return. The money you invest could be your money, say from savings or borrowed money. Forex brokers allow their clients to borrow capital, known as leverage. This allows you to open large positions even with lower capital.
However, leverage is like a knife that cuts on both sides. If you borrow capital and record a series of losses in your trades, you may find it tough to repay. The rule of thumb is to first trade with your money until you understand how the market works and then begin with minimal leverage and you scale up gradually.
Foreign Exchange Trading Strategies
The strategies you use can either make or break your forex trading successes. There are many strategies out there but here are some worth looking at.
- Copy trading- This strategy involves copying the trading styles and moves of more experienced traders. When opening a brokerage account, look for a broker that offers copy trading as a feature.
- Scalping- This trading style allows you to profit off small price movements. You enter a trade with a clear exit strategy.
- Swing Trading-As opposed to day trading involves opening and closing positions within a single day, swing trading leaves your positions open for days or months.
- Stop Loss-This is mostly a sell strategy where you put instructions to sell a currency pair when it strikes a particular price. This can help you minimize losses due to adverse price movements.
Forex trading can be profitable but also risky. From exchange rate risks to currency pair management and anything in between, you must have a clear approach to how to go about your trades. Losses can potentially wipe off your capital and as such you must always exercise caution.